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CHELTENHAM England (Reuters) - New business is coming from unexpected places to help power the whirring, high-tech lathes on the factory floor of Future Advanced Manufacture, one of the companies spearheading Britain's manufacturing revival.

"Even the Germans are starting to deal with us, which is unheard of," said Future AM's managing director Craig Peterson.

Manufacturing accounts for only a tenth of Britain's economy, compared with more than a fifth in Germany which is Europe's leader in the sector. But British factories are in the midst of a resurgence.

One major business survey this month showed the balance of manufacturers reporting rising domestic sales rose during the second quarter to the highest level since records began in 1989.

Future AM produces and tests parts for companies including plane maker Airbus and Schlumberger in the oil and gas industry.

Among its new clients is a German space and aerospace company, which Peterson declined to name. It buys propulsion parts from the firm based in Cheltenham, south west England.

Nearby, many other manufacturers are thriving, making the region one of the leaders of Britain's industrial revival along with the East Midlands which is home to train and car makers.

When Peterson headed a management buyout in 2008, shortly before global recession, Future AM had an order book of five or six weeks and work spread over two or three different sites.

Now it has a five-year order book and turnover rising 30 percent in a year, with a greater focus on mass production on a single modern floor.

So far Britain's economic recovery has been led largely by consumer spending and an upturn in the housing market.

Its sustainability hinges on investment and industry picking up, a crucial issue for the Bank of England, as it gauges when to raise record low interest rates, and Britain's government.

With less than a year before the next general election, clearer signs of a more balanced economic recovery would be a boon for the ruling Conservative Party's prospects.

Toughened up by years of economic malaise at home and by crisis in their biggest export markets in Europe, Britain's manufacturers are finally clawing back their lost output, although it remains 7 percent short of pre-crisis levels.

Exports so far have not picked up as hoped, one of the disappointments of the economic recovery. But there are signs that might be changing.

British manufacturing export orders growth has outpaced the world average for 15 months in a row, a run unmatched since global records began in 1998, according to Markit's purchasing managers' indexes.

EEF, Britain's industry group for manufacturers, said the experience of the global financial meltdown and the debt crisis in the euro zone spurred factory bosses to seek new markets.

Whereas China in 2007 was only the 11th largest export market for British manufacturers, last year it was the seventh. Russia and India are expected to enter the top 10 in the next few years, according to EEF/Barlcays research.

RESHAPED BY RE-SHORING

British manufacturers have also benefited from a new source of growth - work brought back home from some of the major world's major industrial emerging market powers like China.

"We're getting enquiries all the time. Even though we're a little bit more expensive, with the cost of shipping (from China), lead time problems and the quality issues, we're seeing a lot work coming back now," said Peterson.

EEF says one in six companies brought previously offshore production in-house over the last few years, and another one in six "re-shored" work to a British-based supplier.

"This isn't just about recovery... this is actually new business that wasn't made in the UK before, or not for a long time," said Simon Howes, south west area director for the government-funded Manufacturing Advisory Service (MAS).

Surging orders worldwide for the next generation of airliners have also boosted British manufacturing, particularly in the country's south west which is home to major aerospace and defence plants owned by Airbus and BAE Systems.

ADS, a group representing the aerospace and defence industry, says the order backlog for airliners equates to around nine years' work for British companies.

The automotive industry is booming too, having weathered some heavy blows over the last 10 years.

MG Rover Group, the last major British-owned high-volume car maker, folded in 2005, and last year Ford ceased vehicle assembly in Britain after more than a century - although it still makes engines there.

But the likes of Nissan, BMW's Mini unit and Tata Motor's Jaguar Land Rover have invested heavily. Nissan will next year begin producing Infiniti luxury cars from its plant in Sunderland, north east England.

The Society of Motor Manufacturers and Traders expects car production to exceed its 1972 record high of 1.92 million by 2017.

"British manufacturing is brilliant at the moment," said Graham Mulholland, managing director of EPM Technology in Derby, which makes hi-tech composites for production cars and Formula One racers and is seeing double-digit growth this year.

SKILLS SQUEEZE

Despite the upturn, manufacturers still face hurdles.

The manufacturing resurgence has been less strong in England's north west and north east. The unemployment rate in these regions sits above the national average of 6.5 percent, unlike the south west and East Midlands.

And the strength of the pound remains troublesome for manufacturers, having gained around 3.6 percent against the U.S. dollar over the last six months.

"It's always tough. At the moment we're obviously not as competitive as we should be over in the U.S. because of the weak dollar," said Peterson from Future AM.

The Confederation of British Industry, cites political risk as the main threat to the recovery, ahead of the Scottish independence referendum in September and next year's 2015 election.

Consistency in government and monetary policy is key, said EPM Technology's Mulholland.

"We don't need fandango new ideas - we need to have the ear of government," he said.

Attracting skilled staff also presents a challenge as factories big and small ramp up their hiring. A survey from the Recruitment and Employment Confederation showed engineers topped the list of most in-demand staff last month.

"We estimate that, thanks to burgeoning order books, the evolving sector and 82,000 retirees, this country will need an additional one million engineers by 2020," said Ann Watson, chief operating officer of skills council Semta.

(This story has been refiled to add dropped tag 'Reuters' in dateline)